Captives: an increasingly popular risk management tool

The risk management industry has long been a dynamic space, and in recent years, the concept of captives has gained significant traction, especially in Europe.

That’s the view of Marine Charbonnier, head of underwriting for Captives and Facultatives at AXA XL, who is one of the leading voices navigating this rapidly evolving landscape.

Captives—insurance companies created and owned by a parent company to insure its own risks—are not a new phenomenon.

However, their appeal has surged recently, particularly in France, where regulatory developments have paved the way for new captives. As Charbonnier explained to FERMA Forum Today: “There are ‘old ones’ and from the beginning of 2020, we have new ones. Some anticipated the new regulation… and this year, we already have three new ones, and others are waiting for their approval. Today, in total, 18 have received approval.”

This trend reflects a growing recognition of the strategic benefits that captives can offer. Companies looking to gain more control over their risk management programmes and reduce costs are increasingly turning to captives as a viable solution. Charbonnier highlights that captives are being seen as a “strategic tool” that allows businesses to smooth out insurance conditions over time, offering stability in the face of volatile insurance markets.

“It makes life easiest to be closer to the parent, to have a closer governance.” Marine Charbonnier, AXA XL

Challenges of regulation

While the benefits of captives are clear, the process of establishing one is far from simple. In France, obtaining approval from the regulatory body, the Autorité de contrôle prudentiel et de résolution (ACPR), is a lengthy and complex process.

It involves regular meetings at the ACPR level, where approvals are granted only after extensive discussions and careful scrutiny. Companies need to meet stringent governance and capital requirements, which are above the minimum solvency requirements.

Charbonnier explained, “The ACPR is demanding regarding the governance of the captive itself, and also the financial threats… in some cases, they are asking for more than the level given in the approval file, so the captive has the resources to achieve its ambitions over the medium to long term.”

The requirements in France are not unique. Charbonnier pointed out that even in established domiciles like Luxembourg, setting up a captive takes time due to similar governance and capital scrutiny. She added, “I’m not convinced of [the process speeding up]. It is longer in each and every domicile than it was some years ago.”

Governance is a critical aspect of the captive approval process, and it is one area where regulatory requirements can vary from country to country. For instance, Luxembourg has  specific regulations regarding the “dirigeant agréé”, the manager approved by the authorities, who is responsible for the captive’s operations. Charbonnier emphasised that while the specifics differ between jurisdictions, the regulatory environment is becoming increasingly harmonised across Europe, particularly in terms of reporting requirements.

Once a captive is established, it often needs to maintain enough flexibility to adapt to changing business needs. This flexibility is essential for captives to remain responsive to new exposures or changes in their underwriting portfolios.

Legislative developments

When asked about upcoming legislation in France, Charbonnier noted that while no major changes are anticipated in the near future, there is a sense of expectation in the market for further regulatory clarity. She mentions that “a kind of letter is awaited to list the need more precisely, to make the market more confident, to give all the required info at the beginning of the process.”

In other European countries, such as Italy, there has been notable movement in the captive space. Charbonnier explained that two Italian captives that were previously domiciled in Ireland and the Netherlands have recently relocated back to Italy. This move, she said, is partly driven by the desire to simplify governance and maintain a closer relationship with the parent company. “It makes life easiest to be closer to the parent, to have a closer governance,” she noted.

Charbonnier describes captives as a “demanding tool”, both in terms of the governance required and the financial resources needed to set one up. However, for companies that are able to navigate these challenges, captives offer significant strategic advantages. They are particularly valuable in helping companies manage volatility and smooth insurance conditions over time.

Despite their complexity, captives are increasingly seen as a critical part of a company’s risk management toolkit—and Charbonnier noted that the European market is highly mature in this regard.

FERMA Forum Today is in partnership with Captive Review, part of Newton Media.

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